The Price Is Right For AAC Technologies Holdings Inc. (HKG:2018)

With a price-to-earnings (or "P/E") ratio of 39.6x AAC Technologies Holdings Inc. (HKG:2018) may be sending very bearish signals at the moment, given that almost half of all companies in Hong Kong have P/E ratios under 9x and even P/E's lower than 4x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

AAC Technologies Holdings has been struggling lately as its earnings have declined faster than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for AAC Technologies Holdings

Keen to find out how analysts think AAC Technologies Holdings' future stacks up against the industry? In that case, our free report is a great place to start.

How Is AAC Technologies Holdings' Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like AAC Technologies Holdings' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 16% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 65% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 50% each year during the coming three years according to the analysts following the company. With the market only predicted to deliver 16% each year, the company is positioned for a stronger earnings result.

With this information, we can see why AAC Technologies Holdings is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of AAC Technologies Holdings' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 1 warning sign for AAC Technologies Holdings you should be aware of.

Of course, you might also be able to find a better stock than AAC Technologies Holdings. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.